Truth-in-lending Legislation in South Africa

The National Credit Act of 2005 was introduced in South Africa to promote a fair and non-discriminatory consumer credit market; and to establish a structured platform for consumer credit regulation.

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The Act applies to every loan agreement between Lenders and Borrowers dealing “at arm’s length” (i.e. Lenders and Borrowers that are independent relative to each other), subject to certain exceptions listed in the Act. Borrowers are generally defined as the party to whom the credit money is advanced to and similarly, Lenders are defined as the party who advances the credit under the loan agreement.

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Loan agreements, for purpose of applicability of various provisions in the Act, are divided into three categories: small agreements, intermediate-size agreements, and large agreements. Cases excluded by the Act include, among others, large agreements in which the Borrower is a legal entity (i.e., a “juristic person,” as defined under local law).

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The Act established both the National Credit Regulator (“NCR”), an independent government body with enforcement, supervisory and regulatory powers over consumer credit, and the National Consumer Tribunal (the “Tribunal”), a separate government body with powers to adjudicate applications and claims pursuant to the Act and allegations of prohibited conduct under the Act, as well as powers to impose remedies provided in the Act and to review certain decisions of the NCR.

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Disclosure Requirements

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The Act imposes certain disclosure requirements on Lenders during the various stages of their relationship with Borrowers: prior to entering into a loan agreement, within the loan agreement, and throughout the life of the loan. The Act also restricts the manner in which Lenders engage in advertising and marketing to potential Borrowers.

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Irrespective of the type of loan agreement described above, the Act prohibits Lenders from entering into a loan agreement without providing a pre-agreement statement and quotation to the potential Borrower. Pre-agreement quotations must be disclosed using a prescribed format provided by the regulator.

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The Act provides the method for calculating transparent cost of lending and approved components of the total cost of the loan. The interpretation of the approved cost of lending, and the manner and formula to be used to calculate the cost of lending is discussed in the Formula section below

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Remedies and Enforcement Mechanisms

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The Act gives Borrowers the right to rescind a loan agreement within five business days after the date it was signed by them. A Borrower may also dispute all or part of any particular credit or debit entered under a loan agreement, by delivering a written notice to the Lender.

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The NCR has enforcement authority and powers to issue compliance notices that may be further referred to the Tribunal if the Lender fails to comply. The NCR may cancel the registration of a Lender, while the Tribunal has the power to impose administrative fines. In addition, matters covered by the Act may be referred to a consumer court or an alternative dispute resolution agent, and any person suffering a loss as a result of a violation of the Act may bring a civil action claiming recovery. The National Prosecuting Authority has authority to prosecute criminal offenses under the Act.

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For more detailed aspects of the truth-in-lending legislation in South Africa, please download the Legal Summary Document referenced above.

National Truth-in-lending Formula

National Formula

Formula Description

The Act (and regulations issued under the provisions of the Act) stipulates the manner in which the total cost of lending must be calculated and communicated to Borrowers.

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The total cost of the loan is represented using the Total Cost of Credit (TCC) approach, which is formed by calculating daily nominal interest rate and adding to any additional fees and charges during the life of the loan.

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In calculating the TCC:

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Under the Act, “deferred amounts” are the amounts payable as stated in the loan agreement, the payment of which is deferred and upon which interest is calculated or any fee, charge or increases price is payable by reason of the deferment.

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The Act and related regulations require interest to be calculated daily and added to the deferred amount at the end of the month, or, if interest is added to the deferred amount earlier than the last day of the month, this earlier day may not be earlier than the date upon which the repayment is due.

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The interest amount for a given month must be calculated from the previous date interest was added to the deferred amount until the day prior to when interest is added again. The Act prohibits adding interest to the deferred amount more than once per month.

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The Lender may levy (i) initiation fees, on the date written in the loan agreement, but not earlier than the date of approval of the credit application, (ii) monthly service fees, at the end of the month to which they relate, (iii) annual service fees, to an earlier day of the end of the year to which such fees relate, or an annual date specified in the loan agreement or at the termination of the loan agreement, and (iv) transaction-based service fees at the end of the month in which the transaction occurred.

Formula

The Act and related regulations stipulate that the total interest amount for any particular month is the result of the daily interest amount in that given month.

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It is also noted that the manner of calculation employed by any particular Lender may differ from the manner prescribed by the Act and related regulations (see below) However, the amount calculated by the Lender for any year may not differ by more than 0.1% from the amount prescribed in the Act and related regulations.

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The calculation of the actual amount of interest for any particular day is defined as:

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Where:

The principal loan amount for the day must be calculated as the average deferred amount for the day, or as the deferred amount at a particular time in the day, as defined per the loan agreement;

The interest rate must not exceed the maximum prescribed rate applicable to the category of loan agreement concerned;

Number of days in the year may be interpreted as either 365, or as the actual number of days in the particular year;

For short term loans, the number of days in the month may be interpreted as either 30, or as the actual number of days in the particular month.